Q&A with the Pennsylvania Department of Revenue

In an IRC § 338(h)(10) transaction, please explain what happens to the acquired company’s (target’s) Pennsylvania net loss carryovers.

Sep 30, 2013

In an IRC § 338(h)(10) transaction, please explain what happens to the acquired company’s (target’s) Pennsylvania net loss carryovers.

a. In 2012, the IRS increased ABC Corp.’s 2006 net loss from $1 million to $2 million. The RAR adjustment also increased ABC Corp.’s PA net loss from $1million to $2 million. ABC Corp. timely reported the federal adjustment on a Report of Change (RCT-128). ABC Corp. only does business in PA. In 2007, ABC Corp. had PA taxable income of $2 million and claimed a PA net loss deduction of $1 million. ABC Corp. timely filed its 2007 RCT-101 on or before Oct. 15, 2008. Please explain whether ABC Corp. would be entitled to a refund of 2007 CNI Tax resulting from the increase in 2006 net loss.

b. Conversely, if the IRS decreased ABC Corp.’s 2006 net loss, please explain whether ABC Corp. would be subject to additional 2007 CNI Tax. 

The answer to both questions would be no. There was no change in federal taxable income in 2007.  As such, a Report of Change would not be applicable and the Department would have no authority to adjust corporate net income tax.

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.